2010 Jun 8th

The May Hoboken Condo Sales Results

Just What Does it Mean?  More Fuel for the Fire

There have been, literally, hundreds of comments in the past few weeks over the state of the Hoboken real estate market. I don’t think this one will be resolved any time soon but here are the May sales results.   List price is down, average sales price is down, median sales price is down, but both average and median price per square foot is up.

Sales volume is better than it’s been in the past but nowhere near where it would need to be to soak up all the inventory on hand.  To me, that is the critical figure – there are simply too many properties for sale in the Hoboken market.

My question to the nay-sayers, however, is this:  if real estate is going to crash and burn, where do you invest?  The stock market is down, interest rates are effectively zero.  I’d love to hear predictions for which investments are likely to perform well in a doom and gloom scenario.  That’s not to say I’m a believer – just curious to hear your thoughts.

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  1. whynot

    muni-tax-free-bonds! if they go, the world goes!

    also, 6% tax free isn’t too bad!

  2. Lori Turoff

    The tax free part doesn’t do much good if you’re investing retirement funds, though.

  3. homeboken

    Cash – When all the other investments are down as you state, 0% return doesn’t seem that bad. Plus with cash, you can strike any investment you like whenever you like, liquidity.

    Cash is a short term strategy, but nothing wrong with taking chips off the table during the period you know you can’t win.

  4. laki

    My advice on asset allocation for non-professional traders today:

    70% Cash
    20% Corporate Bonds of lightly indebted non-financial companies with 3-4 year duration at most
    9% Blue chip stocks
    1% Out of the money calls on a basket of inflation linked assets (i.e. gold, aussie dollar, oil, etc)

    This portfolio likely gives you the same return as 100% cash but it gives you some protection in case inflation expectations skyrocket over the next couple of years.

  5. laki

    whynot,

    I wouldn’t touch muni-bonds with a 100 foot pole.

    In the 1990s corporations were over indebted and that ended with a .com collapse and decent losses in the corporate debt land. What “got us out” of that crisis was to increase the overall leverage and move it to the consumers’ balance sheets (via mortgages and credit cards). Well that system collapsed in 2007-2009 and the process that is “getting us out” of trouble this time around is to increase the leverage even further and move it to the municipals’ and governments’ balance sheets (world wide phenomenon). Guess what gets hit the hardest once this unwinds?

    If you want to invest in debt instruments look for good balance sheets. Today, nobody in the world has worse balance sheets than US municipalities and European countries.

    In practical terms, you’re taking both credit and duration risk and not really being compensated for either of them. Muni bonds will end up being money good only if inflationary scenario plays itself out – but in that case in real terms you don’t end up making any money investing in these bonds.

    If the inflationary scenario doesn’t play out – massive municipal defaults are coming to theater near you.

  6. cautious

    I agree with Laki. Be very careful about investing in Muni bonds. Defaults are very plausible in this economy…

  7. homeboken

    I agree with the above. Whynot, our past disagreements aside, you should really do some serious DD if you are investing in any muni issue. I don’t want to see you or anyone lose money, and muni investing is a risky assett class to be in.

  8. UPennAlaskan

    laki, cautious, homeboken….would you go short munis? Is don’t buy/stay away the same as conviction to short? Thanks.

  9. Lori

    WPPSS

    http://www.historylink.org/index.cfm?DisplayPage=output.cfm&File_Id=5482

    http://www.publicbonds.org/public_fin/default.htm

    I remember wppss. (Pronounced “woops” for a reason).

  10. laki

    There are better shorts out there than Munis. Very cheap hedges that come to mind: Buy CDS protection on countries like Belgium, Austria, Netherlands, France. A bit more expensive hedges: Buy CDS protection on Ireland, Spain, Portugal, Italy, and a few European banks… Any combo of these offers a better risk/reward than going short munis in my humble opinion.

  11. laki

    That said if someone put a gun to my head and said you have to either go long or short munis in your portfolio – i would short them. I just think shorting European countries debts is a better trade today.

  12. homeboken

    I am risk averse, therefore I don’t short any individual issue. If I don’t think I can make money being long, I don’t invest.

    But as Laki stated above, if you forced me, I would rather be short muni’s vs long. Of course, it al depends on the individual muni.

  13. whynot

    I appreciate the concern. don’t worry, we’re liquid right now and not investing, so we can strike on a purchase, if necessary.

    that said, i do think if there are:

    “massive municipal defaults are coming to theater near you.”

    ….the entire market, including equities, will crash like we’ve never seen before!!! therefore, if you’re in the stock market, tax-free-muni-bonds are a little safer and giving better returns right now than stocks.

  14. boken

    Quite the doom and gloom. It certainly depends on your horizon, but if you have a 10 – 15 yr horizon I certainly would be dollar cost averaging into this market. When inflation finally takes hold (only a matter of time), you will need a hedge and a 1.4% savings account will sadly not do the job.
    High yielding stocks are also an option…get paid while you wait (T, VZ, ED, and now XOM with the oil crisis).

  15. shortsequalmarket

    Over the last 12 years a savings account has had a higher return than the stock market. Something to think about. In fact I think cash may have had a higher return too.

    Western economies (government and individuals) need to address that they spent their wealth and then started borrowing from producer nations to maintain a level of consumption. In addition, the governments made welfare promises that it appers they cannot meet. Most citizens assumed that the pensions or social security from the government would be there (despite all the comments that I do not count on social security). Therefore they spent as iff they had guaranteed income post retirement.

    These aer huge issues that need to be addressed. Corporate profitability has been based on this overspending and it is at risk.

  16. L&S

    Laki – CDS on European countries/banks..You ought to be kidding me. Not because I dont agree with the trade but how do individuals on a blog about hoboken real estate purchase that? Whats your offer on 10K Sovx?

    Why is everyone so bearish on this page? Muni defaults, some maybe but not all. Also, I think even CA will not default and am more then happy to state that case.

    My view – everyone is trying to be a trader ie. buy the house at the bottom, short oil, short muni, long high yield, short IG, short Main, long EM etc. Not sure what everyone does for a living, but dont be a trader because there are people in the mkt who do that for a living and only eat, sleep, and dream about the mkt all day long, for the rest..buy diversified index funds and worry about your day job..

  17. shortsequalmarket

    And we know those people in the market think correctly since without AIG being bailed out last year many would have declared BK. Maybe if they thought of how people try to pay their bills each day instead of technical charts we would have had a smaller financial crisis.

  18. shortsequalmarket

    However

    You do touch on the key problem for housing. During the last decade housing became more of a tradeable investment and the price rose to reflect that fact. The long term consequences for housing are still playing out.

  19. Laki

    L&S,

    I’m only posting this stuff cause Lori asked for an investment advice from doomers and gloombers (I guess most optimists would put me in that category). Not that she would listen to us nay-sayers, but I guess she’s being curious to see what we are thinking. I gave a simple long only asset-class portfolio that I would be comfortable telling my grandmother to invest in. And then someone specifically asked me if i would be shorting Munis so I felt like i needed to elaborate on why I wouldn’t. I’m only being polite and answering questions that are directed to me. If this line of conversation is not appropriate for this blog – i will stop posting about non-housing related items. I don’t want to come off as someone who is preaching, telling people what to do, or trying to sound too smart. I’m just posting my opinions. And i do live and breathe finance more or less 24/7, so i like to talk about anything investment related.

  20. L&S

    Laki – Apolgize, Did not mean to offend you. I just found it amusing that buying CDS on SOVx or Main would be mentioned on a real estate blog as a hedge.
    Re your posts..Lori controls the blog so who am I to decide what is appropriate, everything is cool with me.

    However, I am curious to understand why you are even thinking about buying real estate in hoboken. I assume you are are doom and gloomer or just a bear. (there are different levels of doom and gloomers). IF you are not looking to buy then obviously the question can be ignored.

  21. Lori

    Hey – I enjoy the financial point of view. I don’t consider it off topic at all. The economy affects real estate and vice versa, no?

  22. UPennAlaskan

    I’m a bearish bull. Savings kept in checking acct for rainy day fund and future 20% DP. Potential home owner sometime in the next 6 – 18 months based upon how personal family considerations pan out.

    My entire 401k/IRA monies are allocated to market neutral or slightly bearish strategies. This has been the case for the past 4-6 weeks. At this time the trend is so negative, it’s really hard to be a bull. Many 200 day moving averages are all pointing down. Momentum carries the short term. And the 200 day MA is like a huge barge that turns really really slow in the water. I won’t be bullish until this trend flattens out and turns upward.

    In the meanwhile, I have several pair/spread trades on. Long low beta vs short high beta. Long US equities vs short European equities. Long USD vs short EUR.

    Longer term, fundamentals play out and I have lots of optimism that clever, hard-working people will make things work out. My number #1 indicator is electric demand. This metric has a very very high level of precision unlike say GDP growth or % unemployment. Electric consumption and economic output is well correlated. Year-to-yr power demand is up a few %. There is no doubt in my mind the recovery is real.

  23. Laki

    L&S,

    “However, I am curious to understand why you are even thinking about buying real estate in hoboken”

    I love Hoboken. I lived there long time ago…. I would consider buying down the road but only if prices go down meaningfully. If not, I won’t buy – not now, not ever. I would be OK renting forever if I figure in my head that renting is cheaper than buying.

    By the way, I could easily buy a decent unit in Hoboken without having to take out a mortgage. But the decision whether to buy or not is not a matter of affordability to me. In my head – it is either a good investment or it is not. At these prices i think it’s not, so i rent. I know I’m not a representative sample. Most people don’t behave like me in this regard. I would argue that most behave irrationally (strictly financially speaking) when it comes to buying a house. People tend to invest all their wealth in one asset, their house, in a leveraged fashion and somehow they’re okay with that. If you replace the word “house” with just about any other asset and ask those same people if they would ever take all their capital, borrow 5 10 or 20 times on top of it, and invest everything in that one asset, they would all say NO WAY. But somehow when that single assets is a house the logic goes out of the window.

    Anyways, In addition to having a peculiar interest in Hoboken because of my sentimental attachment to the town, I follow anything mortgage related nation wide because I trade mortgage bonds for a living. I spend good part of my day every day mulling over mortgage bonds and the underlying collateral trends, building models, and doing anything that I can think of to gain an edge in understanding what could potentially affect people’s decisions to prepay or default on their mortgages, because these decisions affect the valuations of the bonds that I’m buying and selling.

    While most unwavering optimists would immediately label me as a gloomer and a bear the irony is that from the bond perspective I have a vested interest in home prices going up! In a positive HPA scenario the bonds I own nowadays would go from what I consider a good investment to a ridiculously good investment. But everything I’m seeing out there tells me I’m not going to be that lucky.

  24. Laki

    UPennAlaskan,

    Recovery might look real but it’s fueled by borrowed capital world-wide and it is unclear how those debts will be settled down the road…. If you found a bum on the street and lent him $100K – he too would recover. His standard of living would go up drastically and in this micro-universe the economy would be booming as well. The bum would start to use more electricity and would be consuming goods whose delivery would also add to the electricity consumption…. But what happens down the road once he spends his $100K? And what happens to you who lent $100K to the bum and kept living as if the $100K asset on your balance sheet is “money good”. Double whammy – the bum goes back to being a bum, you wake up one day discovering you’re a lot poorer than you thought the day before. And we’re in a downward spiral in which both you and the bum are contracting your economic activity.

    So in my example, was that tick-up in electricity spending a real recovery?

    Leverage distorts all the fundamental metrics. All the “fundamental” indicators must be put to a great level scrutiny given the economic agent’s balance sheets today.

  25. FN

    Laki,

    interestings point on leverage. I find it shocking too how easily people are willing to take on leverage for buying real estate.

    I have not followed the blog closely so apologies if this is a repeated But at what Price to Rent Multiple or Gross/Net Yield would you think it is worth buying in Hoboken ?

  26. UPennAlaskan

    Laki–

    Two aspects (1) precision and (2) distortion. Electricity usage is very precise. Calculating all the electrons is easy and well tabulated. It is though as you say subject to distortion from leverage as the number maybe inflated. Stark contrast to payroll numbers, unemployment figures, GDP growth rate, housing stock (shadow inventory) which all at best is a rough estimate and worst case even directional incorrect. In this ever so non-widget world, classical economic metrics do not seem to be reliable. I have similar convictions about shipping tons. At least these are calculatable (haha, I’m making up words) numbers.

    If I pump up and take steriods and bench press 300 lbs….well I pressed 300 lbs period. Doesn’t matter whether if it was juiced or a la natural. It happened. Yes, my normal/natural steady state could be 200 lbs. But 300 lbs occured.

    I too believe more deleveraging pain will come….hence my portfolio is market neutral/slightly bearish for now. Not all decisions are economic focused (wife), hence probably jumping in the NYC metro real estate market soon. Disclosure, previously owned 2/2 condo in philly burb from ’03 to ’05.

  27. vreporter

    Well, I’m glad to see that most are realizing that a “home” is still an investment first. As for all the investment advice here, any strategy that takes advantage of de-leveraging (in general) is the right START.

    This real estate cycle has just begun its deflationary cycle, so that won’t be realized for a very long time (in hindsight).

    Hoboken rent/own ratios have got a long way to go still. A crash does not have to be quick. I’m guessing that this is going to take at least four years or so. That is the main misconception by the hopefuls on the Hoboken property market. It’s the slow declines that are the most dangerous!

    You are better off in AZ, NV, FL and CA otherwise!

  28. Tiger

    vreport, I always thought a we use the word ‘crash’ to indicate a sudden and quick collapse… no? also, how is a gradual decline most dangerous (with an exclamation mark !)? To be a slowly moving market, up or down, is much better than one with sudden rises and bumps.

  29. whynot

    Here’s Laki’s link from the other day:

    http://info.trulia.com/file.php/1908/Prices+to+Rent+Ratio+For+Website.pdf

    Hoboken is about a 15 – vreporter, how is that “Hoboken rent/own ratios have got a long way to go still.” If you don’t believe the ratio, just walk into a realtor and look at the listings – a nice 2/2 is around $2,900 to 3,2000. again, people like vreporter just making up facts! :(

    all of you are doom and gloom – you’re also a little too late. the crash happened, the correction happened. you didn’t perdict it!! but, you keep piling on. i call you guys followers, not leaders!

    my opinion, is that we can in all likelihood be at the bottom, as things have been steady for a while now. so, go look into your crystal balls because that’s all you’re doing. guess work! so please call it that! 😉 my opinion, is guess work and is just as relevant as your johnny come lately opinions. :)

  30. L&S

    Laki – should have guessed you traded mortgages. Mtg traders are some of the most bearish people that I have ever met. Not trying to be funny but I really do believe mortgage traders tend to be massive bears. I think its got to do with the distressed asset class, fraud and broken market that you have to deal with day and day out.
    – Take another point of view. My home is not an investment, i never calculate the equity value in my net worth. It is leveraged but it has significant equity in it, i have lost money on it but I could never rent the kind of place that I live in since I do believe it is very unique. When I do decide to move/upgrade then I make a decision whether its better to sell or rent the place out and then it becomes and investment

    The other place that i rent out is an investment, it is leveraged, i could pay it down if I wanted but 4.25% 30yr money is cheap financing, plus I intend to hold the place for a long long time since i think Hoboken is a great renters market.

    My PA is not a trading vehicle, I dont try and make weekly, monthly calls in my PA. It is actually very very conservative since my day job is not and I have all the vol that i can handle in my day job.

    UPenn – Never heard of Stark spreads as a predictor of economic growth. Will actually read into that, i do believe that anecdotal consumer behavious is best forward indicator of the macro environment.

    Laki – your leverage example with the $100 and bum is biased towards the downside. Leverage is not a bad concept, excessive leverage or leverage used for unproductive tasks is dangerous but leverage used for productive task is not..and i am not saying make an investment just because you have leverage. The bum borrows $100 uses that to open a deli or a liquor store; employs 2 people, makes a decent profit and return the money..so its not leverage but what you do with it

  31. Craig

    Hoboken’s rent vs. buy ratio is about 15-17 right now depending on what part of town you want to be in. 15 and below is considered the range where buying is equal or cheaper than renting. Considering Hoboken’s ratio is about half of NYC’s (which is about 33 right now), I’d say Hoboken is a tremendous bargain considering the two cities are a mile apart.

    Now anyone who thinks Hoboken’s rent vs. buy ratio is going to get down to 9 or 10 like Vegas or Phoenix is kidding themselves, just as they would be if they think San Francisco’s ratio will ever get down that low. There is a reason why the major coastal urban centers on both coasts have the pricest real estate in the country. Those reasons haven’t changed.

  32. laki

    Craig – Not long ago New York City’s rent-to-buy ratio was half of what it is right now. And as i might have said before, in my opinion, Manhattan’s ratio is poised to go back to where it was before and this is a more relevant factor that should be used to gauge future pricing in Hoboken, rather than Hoboken’s current ratio. I presented arguments for this many times before, so I don’t want to repeat myself. But that is what I believe.

    L&S – Regarding leverage – the world as a whole has never in history been more leveraged than it is today. Not even close. And the leverage has been growing at pretty much never before seen rates over the past few decades. I spent months analyzing this stuff and came to conclusion that eventual “repayability-in-real-terms” (making up words) of bulk of these debts is a probability 0% event or something very close to that. So this assumption, which I’ve worked very hard to convince myself is true, makes up the basis for how i see the world going forward.

    I will say one more thing on investing – a good investor will invest in such way that if his thesis is right he will make money and if his thesis is wrong he will break even or make very little. Very few people are able to achieve these outcomes – but i think striving for that is the way to go.

  33. Craig

    @Laki – When exactly was Manhattan’s rent vs. buy ratio last at 16? That would be half of what it is now. When you claim it was not so long ago, back that up with a verifiable date. You may be surprised how long ago “not so long ago” was. So let me get this straight: you believe that Manhattan’s rent vs. buy ratio will be reduced by half in the near future? That means a dwelling renting for $3000/mo could be bought for $576k – roughly where Hoboken’s ratio currently stands.

    Tell us: what current activity in Manhattan’s real estate market leads you to conclude such a transaction will be possible in the future?

  34. whynot

    “Not long ago New York City’s rent-to-buy ratio was half of what it is right now.” – just plain wrong. again, people making up info! :(

  35. Laki

    whynot, you got me. I’m making stuff up. I guess bloomberg is making stuff up to (as are many other serious researchers who don’t publish their stuff online for the world to see):

    http://preview.bloomberg.com/news/2010-06-04/manhattan-condos-overpriced-for-sale-may-be-recycled-as-rental-apartments.html

    Please note that these guys use a different methodology than Trulia, but using their methodology over time you get that rent-to-buy ratio was 2.34 times lower in the early-mid 90s in Manhattan compared to where it stands today…. According to their methodology the ratio went from 8.1 in the early-to-mid 90s to 22 in 2008 and now it stands at 19.

    If I was you i wouldn’t be accusing people of lying, especially if you’re unsure yourself as to what the facts really are. You’ll lose all your credibility pretty quickly behaving like that.

    Quote:

    “The relationship between home prices and rents typically remains steady within a market, Miller said. In Manhattan, the average apartment, adjusted for inflation, cost 8.1 times annual rent from 1991 to 1997, according to Miller Samuel data. That means that in those years, buyers in Manhattan concluded that the long term benefits of owning an apartment — tax savings and property appreciation — were worth an initial investment of eight times the cost of renting.

    Then in 1998, Manhattan prices began a decade-long climb, with year-over-year values rising by 10 percent or more in most quarters. By the second quarter of 2008 apartment prices peaked at 22.4 times annual rent, according to Miller Samuel data.

    Buy Vs. Rent

    At that level, buying rather than renting in Manhattan only makes sense if the purchaser expects prices to continue rising at a meteoric clip, with future sales’ profits justifying ownership costs that also include property taxes, interest and maintenance fees. New York is the No. 1 city in the U.S. where the overall costs of buying are “significantly more expensive than renting,” according to a report released yesterday by property website Trulia.com.

    Manhattan’s multiple in the first quarter of 2010 was 19 times rent, even as rental prices fell 6.1 percent from a year earlier, according to data from Miller Samuel. “

  36. Laki

    Craig, to answer your questions:

    “So let me get this straight: you believe that Manhattan’s rent vs. buy ratio will be reduced by half in the near future? :

    Not sure about “near future” but within the next 10 years – yes i really believe that.

    “Tell us: what current activity in Manhattan’s real estate market leads you to conclude such a transaction will be possible in the future?”

    Looking at the current activity is not necessarily the best methodology to use to forecast the future. If you were an observer of Japan in 1988 or NASDAQ in 1999 the then-current market activity would’ve been meaningless. You would’ve drawn all the wrong conclusions. All I’m able to do is look at the fundamentals and conclude that they’re unsustainable. The second thing to look at is what the potential catalysts could force the return to the equilibrium… I’ve presented some of them before (systematic global deleveraging that will take place at some point in time down to road being the most potent catalyst that will re-adjust not only Manhattan’s real estate pricing but many other things in the world that are out of whack). There could be other catalysts too, i could write a book on this topic, but this is not the place to go over these things in depth.

  37. TS

    Laki,

    Bear in mind that 15-17 years ago doesn’t quite qualify as “not long ago”.

    Also, I’m curious as to how one can invest in such a way that no losses are possible.

  38. laki

    TS,

    How to achieve low probability of losses? Vast majority of time stay mostly in cash (i.e 90% of time). Stay in cash and do tons of research and work, but don’t deploy your cash. Work on identifying the opportunities that might or might not play themselves out.

    When sh*t hits the fan (which happens in some market every several years at least if you keep in mind the entire spectrum of investment opportunities) and things start unraveling and leveraged people and entities in those markets get forced to act in an irrational way because they don’t have any other choice, thats when you deploy your cash in arbitrage-like situations which you worked so hard to identify during times when the music was playing and everyone was a happy camper. Takes a lot of patience and work. I think vast majority of people are not able to do this because they get sucked in to invest when everything is rosy, and those that aren’t investing during rosy days – well those people are either too risk averse that even when the opportunities present themselves they’re unable to pull the trigger, or they simply are unable to identify the right opportunities.

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